If you want a settlement network, why not use POS?

Chapter 0 Introduction

The controversy over Bitcoin expansion has been going on for almost a year, and has reached a climax recently. The pressure on the network has reached its limit, and the community is arguing too fiercely. A large number of insights and plans have emerged, and one voice I really cannot understand is that this voice wants to transform the Bitcoin network into a pure settlement network. This article attempts to explain that if Bitcoin is just a settlement network, then Bitcoin will be completely unable to compete with POS coins. The current BTS and ETH performance far exceeds Bitcoin, and even Ripple is better than Bitcoin.

Chapter 1 Settlement System

Let’s clarify the concept before writing.

The settlement system, or clearing system, or payment clearing system, is the same concept, which refers to the institutional arrangement for managing the creditor-debtor relationship between traders and financial institutions. This is the rule for intermediaries providing payment services to manage money transfers.

Simply put, a settlement system is a way to handle claims and debts. It is not a currency, but a set of rules for handling currency ownership.

UnionPay, which we use every day, has a complete settlement system.

We use RMB banknotes to buy things directly, which is a simple payment, paying money and getting goods. This is a point-to-point payment, where you and the merchant are both two endpoints, and wealth transfer occurs directly. But if you swipe a credit card, it will be a little more complicated. Because when you swipe a credit card, the account in your credit card cannot be "self-determined" by you and the merchant to conduct financial transactions, but must obtain the help of the bank. Your credit card bank will record a debt in your account book with your authorization, and the merchant will record an income in his account book with the help of (possibly another) bank. At the same time, (possibly two) banks will also charge a certain fee. This results in three (or four) accounts, and finally the ownership of these three bills is handled by the settlement system.

The benefits of the settlement system are obvious - it facilitates market transactions. Using cash is troublesome to count money, and even more troublesome to make change. There is also the risk of counterfeit currency. If it is a large transaction, such as 1 million, cash is almost impossible to trade.

In addition to credit cards, Alipay and WeChat Pay, which we use in daily life, are also settlement systems.

Who can do the settlement system?

The first condition is to obtain government authorization. This is self-explanatory. If you do settlement without a license, it is illegal.

The second condition is that you must have enough reserve funds, that is, during the settlement process, even if you have not received the money, you must be able to pay the next settlement unit.

The third thing is that you need to have the technology. For example, if you can make an Alipay, you can write a program to obtain the UnionPay interface to complete the clearing.

According to available data, the People's Bank of China manages as many as 2,000 settlement units.

Chapter 2: Bitcoin is a currency first and a settlement system second

Let us reiterate the consensus definition of Bitcoin. It is important to mention that what we are talking about here is the "consensus definition". This is what everyone agrees on.

The first and most consensus definition is: Bitcoin is a digital currency.

The second definition is: Bitcoin is a peer-to-peer electronic cash system. Bitcoin: A Peer-to-Peer Electronic Cash System, this is the definition given by Satoshi Nakamoto.

The third definition is: Bitcoin is a decentralized public ledger.

Everyone would not deny that these three definitions are consensus-based, right?

So what is the use of Bitcoin?

Our consensus on the greatest use of Bitcoin is to use it directly as wealth.

For example, as a currency. We can now use Bitcoin to shop, store value, and even as a unit of account for contracts.

Another example is Bitcoin, which has achieved the fairest currency issuance mechanism in the world - POW, or proof of work. This is also the core technology that makes mining a success.

In addition, we also use Bitcoin as a settlement tool.

For example, you no longer need to go through a bank to exchange foreign currency, you can just use Bitcoin directly.

For example, in an offchain wallet, users sign a debt contract with offchain wallet providers, and then use the Bitcoin network as a clearing system. Similarly, Bitcoin financial management applications also use the Bitcoin network as a clearing system.

Bitcoin is a currency on one hand, and a settlement tool on the other. Which came first, the chicken or the egg?

Obviously, Bitcoin is a currency first and then has a settlement function. And once Bitcoin loses its currency attribute, its settlement attribute immediately collapses.

Whether Bitcoin is used as wealth or as a settlement system for wealth transfer, the core premise is that Bitcoin is a store of value. Without everyone's expectation of Bitcoin's appreciation, most of Bitcoin's functions will not occur.

The expectation of appreciation mainly comes from the scarcity of Bitcoin (of course, technology is also important, but technology is replicable, while scarcity is not).

The scarcity of Bitcoin does not mean that there are only 21 million BTC as a unit of account, but that POW consumes resources, and resources are scarce; people's attention is scarce; and people's consensus is scarce.

If Bitcoin cannot retain people's attention and consensus, then it will not be scarce, and Bitcoin will have no value. Who the hell cares if there are 21 million of them? Without scarcity, there is no value, without value there is no POW, without POW there is no computing power to ensure security, and everything else will be gone, not to mention any settlement system.

Chapter 3: The hope of making Bitcoin a settlement network to earn higher mining fees will be in vain

The profit of the settlement system is very low. UnionPay is the largest settlement system in China, and its annual profit is several billion (data from Luoji Siwei: Friends of Time 2015 New Year's Eve Speech (Part 2) 31:27). It is not even one-tenth of the current market price of Bitcoin. The current mining power of 800P consumes more than 1 billion yuan in electricity costs per year. Considering the manufacturing costs of mining machines and the operating costs of mining farms, even the profits of ten UnionPays cannot support the computing power of 800P.

Of course, as a settlement system, Bitcoin’s ambition is not only to settle payments with UnionPay and Visa, but also to anchor all wealth and smart contracts. All of these can be backed by Bitcoin, and those who hope to build Bitcoin into a settlement network see this and think that there is a great opportunity to make a fortune, so they want to limit the block size and make a fortune by increasing the packaging transaction fee.

It is strange that some people have come to the conclusion that the block size should be limited.

If you want to earn more transaction fees, there are two ways: one is to increase the number of transactions, and the other is to increase the single transaction fee. Now the 1M block transaction data is limited to a maximum of 7 times per second, so you have to try to increase the transaction fee. Increasing the transaction fee means that others will not be forced to reduce the number of transactions, and the result is an economic dynamic balance. This balance is an average profit.

But this idea has a fatal flaw. These people are just like they are closing their eyes, only knowing how to fantasize and not opening their eyes to see the world. This flaw is - does the settlement system really need Bitcoin with its high handling fees?

UnionPay has gained monopoly power profits, but the annual profit is only a few billion. Don't they want to make more money? The key is that they can't make more money. Why? Alipay is free, WeChat Pay is free, and Lakala has lower fees. Users will not stay at UnionPay's settlement layer.

The technology for settlement is too simple. Even if you gain monopoly profits in power, you cannot gain monopoly profits in technology. Bitcoin has created a great settlement network, but this greatness is based on the "power monopoly" rather than the technology monopoly.

The "power monopoly" I am talking about refers to the fact that Bitcoin, through its monetary attributes, encompasses the largest number of digital currency users. These users give value to Bitcoin, thereby maintaining Bitcoin's computing power and giving Bitcoin its unbreakable security attributes.

This is just like UnionPay. First, the Chinese people gave the Chinese government the tools of violence by giving up their private property rights. Then the Chinese government monopolized UnionPay settlement through the tools of violence and at the same time gave UnionPay an irrefutable legal status.

At this point, Bitcoin's settlement attribute is achieved through its user base, not through the advancement of technical codes. Just like UnionPay's monopoly profits, it is achieved through laws recognized by the Chinese people, not through technological advancement.

Why does Bitcoin gain a user base? It all comes down to the scarcity of Bitcoin. Does Bitcoin have scarcity as a settlement network? If it is a pure settlement network, Bitcoin has no scarcity at all!

Ask a question, is there a better decentralized settlement network than Bitcoin? This question is to ask, where are Bitcoin's competitors? Just like Alipay to UnionPay.

Chapter 4 The best choice for decentralized settlement system is POS

When everyone is discussing whether to expand the capacity, they consistently ignore Bitcoin's competitor, that is, POW's competitor - POS.

When the founder of BitShares talked about the advantages of POW at the beginning of this month, POW supporters seemed to have won forever, and it seems that everyone is beginning to ignore POS. However, market rules cannot be ignored.

We use centralized settlement tools in real life, such as UnionPay and Alipay, because of their high efficiency and low cost, which is determined by the laws of the free market. We cannot ignore them, just like we cannot ignore the gravity of the earth, they will always accompany us.

POW is to obtain voting rights by paying a certain amount of work, while POS is to obtain voting rights by promising to delay the consumption of your wealth.

What is the core element of settlement work? The settlement system is the rules for handling credits and debts, and its core requirement is that the bearer of the rules has the ability to guarantee. For example, if I want to borrow 100 yuan from Zhang San, and Zhang San is afraid that I can't pay it back, I will find the richest man in the village, Li Si, to guarantee it. Zhang San sees that the rich man Li Si is willing to endorse me, so he will believe that he can definitely recover the debt, so he is willing to lend me.

"Guarantee" gives confidence to both parties of the settlement and facilitates the transaction.

To build a settlement system within the UnionPay framework, the government requires you to provide prepayment. The settlement function of Bitcoin is apparently based on the non-replicable and unchangeable properties of the Bitcoin blockchain. But if you were asked to write a smart contract and broadcast it to the blockchain without any collateral, would you dare to lend me 1 million RMB? Yes, Bitcoin's POW proof of work can guarantee the authenticity of information on the blockchain, but settlement is not guaranteed by the authenticity of the information, but by collateral. The purpose is to facilitate transactions by giving the creditor the confidence that the debt can be recovered even if the debtor goes bankrupt.

POS has the ability to guarantee by nature, because it records accounts by delaying the consumption of the currency age. The person who records accounts must have the currency age. And this currency age cannot be forged. This can be used as a guarantee, which can achieve the core condition of settlement.

Why do we dare to use offchain wallets? Is it because the Bitcoin blockchain has an unbreakable computing power? Is it because of POW? No! No! It is because we believe in the credit of offchain wallets, because they have credit endorsement and they have reserve funds. People who dare to store Bitcoin in exchanges do so because they believe that the exchange has money and coins, not because they believe in the Bitcoin blockchain.

When POW-ers desperately laugh at BitShares, when Bitcoin despises Ethereum, when miners ridicule banks for developing R3, and when coin holders despise central banks for competing for altcoins, please don’t forget that they have a more efficient and cheaper settlement network. Although they don’t have a better currency.

Chapter 5 Bitcoin is still good

I said a lot of good things about POS in the previous chapter, but please don’t understand that I want to defect from POW to POS. That’s not what I mean.

Even as a settlement network, Bitcoin is better. A settlement network that can be used as a currency is better.

Bitcoin uses proof of work, or POW, to keep accounts, which ensures the decentralized nature of Bitcoin. By attracting users' attention and consensus, this ensures the scarcity of Bitcoin and brings a strong price. Using Bitcoin with a price to guarantee settlement is a global peer-to-peer settlement system.

And proof of stake, or POS, will inevitably lead to centralization.

Chapter 6 What happens when the Bitcoin network becomes a pure settlement system?

We assume that the block size will always be limited to 1M, and the network will form an ecosystem through side chains and lightning networks, as well as large and small offchain wallets and exchanges, while the Bitcoin main chain will become a settlement system.

The so-called pure settlement system means that users will no longer place Bitcoin as a currency payment on the Bitcoin main chain. If payment is to occur, it needs to be carried out on the Lightning Network and the side chain. What will happen?

All users must pay high fees to obtain their first real Bitcoin. The so-called real ownership of Bitcoin means that you have control over the private key and the blockchain access rights of the UTXO unit that is locked by the private key. It does not mean that you own a debt unit in an offchain wallet. If this requires high fees, it will prevent new users from joining. Bitcoin has since become scarce in terms of the number of users.

Cross-chain transactions outside the main chain require high fees, which directly leads to the emergence of more complex cross-chain applications. There are two concepts of POS machines for credit card consumption: one-clearance machine and two-clearance machine. One-clearance machine means that after you swipe your card, it will be settled by UnionPay and then to the collection account. The two-clearance machine means that after you swipe your card, it will first go to the UnionPay clearing center, then to the third-party collection account, and finally to the collection account. Why do these POS machines do this? Because as long as there is money deposited in the third-party collection account, you can use a non-100% reserve system to deposit funds, and you can use it to invest to generate additional profits.

Because our credit card must go to UnionPay's settlement center first after consumption, which at least guarantees the authenticity of the transaction. But please think about Alipay again. When we use Alipay to make consumption transfers, the first stop is not to UnionPay's settlement center, but to Alipay's own settlement system. This gives Alipay the power to issue RMB, just like Jack Ma can add a few zeros to his Alipay account. It is technically feasible, but of course once it is implemented, Jack Ma will go to jail.

If the transaction fees on the Bitcoin main chain increase significantly, applications such as "Bitcoin secondary clearing" and "Bitcoin Alipay" will definitely appear.

When a user on a side chain sends Bitcoin to another side chain, the transaction will be settled in an intermediate fund pool after the Bitcoin is cleared on the main chain, and then sent to another side chain. The authenticity of this intermediate fund pool is in trouble. If you don’t believe what is said here, you can imagine whether the current exchanges have the ability to issue fictitious Bitcoins.

In order to avoid liquidation on the main chain, offchain cross-chain transaction applications can be generated between the two side chains, which is "Alipay". The liquidation between the two side chains actually has nothing to do with the main chain, it is a creditor and debt accounting relationship.

If this is the case, then Bitcoin can only maintain its authenticity on the main chain, and the entire Bitcoin ecosystem will spawn a huge and uncontrollable accounting unit disguised as Bitcoin.

Now let’s answer the question: what will happen when the Bitcoin network becomes a pure settlement system?

The transaction fees on the Bitcoin main chain have increased significantly, resulting in the inability to increase the number of users on the Bitcoin main chain, making it difficult to increase the number of users who actually hold Bitcoin, and causing the Bitcoin ecosystem to be full of falsehoods and forgeries. Eventually, people no longer believe in the authenticity of the Bitcoin blockchain because we can no longer verify the authenticity through cheap private keys.

Chapter 7: Marginal costs close to zero guarantee mining benefits

Maximizing the value of Bitcoin requires network effects and a large number of users. Bitcoin needs attention and consensus. We need to attract more user transactions on the blockchain. We need to maintain low transaction fees to maintain the continued growth of the number of users.

When miners cannot obtain enough block rewards, their interests can only be guaranteed by increasing the number of transaction fees and the price of Bitcoin. You cannot limit the number of transactions and still expect transaction fees to rise. Limiting the number of transactions will only kill the network effect of Bitcoin and thus kill Bitcoin.

In the 1980s, my family made a phone call to my dad because he had a car accident. The call cost 10 yuan and the call was hung up in less than 2 minutes. Now, the cost of making phone calls is so cheap. But the profits of telephone operators are so high that telephone operators have built more signal towers and bought more routers.

Miners now, you say you want to increase the mining fee to ensure the operation of computing power, and turn the Bitcoin network into a clearing network to increase transaction fees. Isn't this a joke? You are stupid! Our Internet access fees have been declining for more than 20 years, telephone charges have been declining, and electricity charges have been declining. But all the services we get are getting better and better, and operators are making more money. This is the network effect. Students, this is the huge profit brought by the marginal cost close to zero.

The marginal cost of mining is very high when the computing power continues to increase, because as the computing power increases, old mining opportunities are constantly eliminated. But this is an economic account, and the computing power cannot continue to increase. When the computing power is stable, the income from miners' fees will be expanded by the network effect of users, and even if the block reward is reduced to zero, mining can still generate income.

But what if we limit the block size? What if we actively abandon the network effect? ​​Then the computing power will continue to decrease, the security of Bitcoin will be shaken, and the price of Bitcoin will continue to fall to zero.

In fact, from the discussion between BIP 101 and BIP 100, I believe in BIP 101 more. I believe that blocks need to continue to expand to accommodate more transactions. Locking the transaction limit will only kill Bitcoin. Although I also think that expanding the block size limit to 32G is too radical, there will definitely be a need for blocks larger than 1G in the future.

Chapter 8 Conclusion

We need to expand capacity, please start from 2M now.

I am a Bitcoin holder and I support the 2M expansion.

If you are also a Bitcoin stakeholder, please join us. Thank you very much.

If you find the article useful, please give me some Bitcoin to encourage me to continue writing.

Author: tan90d (Weibo @LightningHSL WeChat tan90d)
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